The
financial alarm bells are beginning to ring loud and clear. The world is
waking up to the fate of the U.S. dollar and is rapidly losing their appetite
for the once-mighty currency. This has very ominous implications for the
future of the United States, a nation that must borrow around $1.5 Trillion
per year just to stay afloat. America has enjoyed the benefits of having the
world reserve currency and has simply been able to print and borrow to fuel
its excess spending and fiscal irresponsibility. The dollar has held up
rather well considering the amount of printing, borrowing and staggering
levels of debt. Those days appear to be ending as the dollar’s days are all but
numbered.
Last week, the Standard & Poor’s financial rating company revealed it
has downgraded its outlook for the nation’s future creditworthiness. The
rating had been “stable.” It now is “negative.” Standard & Poor’s also
announced it is considering a change in the credit rating it has assigned
U.S. government debt. The rating now is AAA, the highest possible. But
Standard Poor’s said there is approximately a 33 percent chance in may have
to advise clients that Americans, as a government, no longer are low-risk
when it comes to buying bonds and financing debt otherwise. This was the
first major shot over the bow of the U.S. economy.
The second shot came this week from a number of Chinese officials, all
echoing the same sentiment that China should diversify out of the U.S.
treasuries and reduce their foreign exchange reserves. Tang Shuangning,
chairman of China Everbright Group, said on Saturday that:
China should reduce its excessive foreign exchange reserves and further
diversify its holdings. The amount of foreign exchange reserves should be
restricted to between 800 billion to 1.3 trillion U.S. dollars, Tang told a
forum in Beijing, saying that the current reserve amount is too high. China
should further diversify its foreign exchange holdings. He suggested five
channels for using the reserves, including replenishing state-owned capital
in key sectors and enterprises, purchasing strategic resources, expanding
overseas investment, issuing foreign bonds and improving national welfare in
areas like education and health.
Tang’s remarks echoed the stance of Zhou Xiaochuan, governor of China’s
central bank, who said on Monday that:
China’s foreign exchange reserves “exceed our reasonable requirement” and
that the government should upgrade and diversify its foreign exchange
management using the excessive reserves.
Meanwhile, Xia Bin, a member of the monetary policy committee of the
central bank, said on Tuesday that
1 trillion U.S. dollars would be sufficient. China should invest its
foreign exchange reserves more strategically, using them to acquire resources
and technology needed for the real economy.
To put Mr. Bin’s comment into perspective, China’s foreign exchange
reserves increased by 197.4 billion U.S. dollars in the first three months of
2011 to 3.04 trillion U.S. dollars by the end of March. So, a Chinese central
banker and member of the monetary policy committee is essentially calling for
a 66% reduction in U.S. reserves!
What is even more devastating to consider is that China has been a major
buyer of U.S. treasuries and if this rhetoric translates into direct action,
China will not simply be reducing their purchases, but turning into a net
seller. The impact of this policy shift has grave consequences and can not be
easily understated.
When
the two major political parties can not even agree on a spending cut that
amounts to just 2% of the total budget deficit, we are in serious trouble.
The media spectacle over the past few weeks really has to be put into
perspective. The boneheads running the U.S. government were arguing over
whether they would cut $30 billion or $38 billion when we have an annual
budget deficit of $1.5 TRILLION this year alone! It is clear that neither
party is serious about getting the fiscal house in order. Neither is willing
to make any cuts to our bloated military budget that accounts for nearly 50%
of global arms spending, is six times larger than the military budget of
China and has a Navy larger than the next 13 navies combined!
Not only are politicians unwilling to address the outrageous spending, but
they are also unwilling to address the revenue shortfall by taking any
serious steps to address corporate tax dodgers such as General Electric, Bank
of America or Exxon. This is precisely because our government has been
hijacked by the banks, oil companies, military-industrial complex and other
large corporations. Their priority is corporate profits and not the best
interests of the United States or its people. But let me get off my soapbox
for a moment and let’s take a look at the technical chart for the dollar.
Not a pretty sight, as the USD index has formed a bearish head and
shoulders pattern and has fallen through support to its lowest level in
nearly three years. I supposed we could get a rally in the coming days, but I
certainly would not hold my breath. Any dollar rally is likely to be short
lived and used as an opportunity for foreigners to exit their positions and
dump dollars. With the debt ceiling rapidly approaching, again, and the
debt-to-GDP ratio now over 100% by some measures, it is hard to find a rationale
for continuing to hold dollars. When factoring in unfunded liabilities, some
estimates have the true debt-to-GDP of the United States at around 500%,
making Japan’s 200% look like a model for fiscal responsibility.
When you combine bought-off politicians, record debt and deficits,
declining tax revenues and endless wars, there eventually will come a time
when the world no longer accepts the fiat currency of the nation and begins
to dump their holdings. For the longest time, nations like China and Japan
have been reluctant to do so because it was also in their interest to keep
the pyramid scheme afloat a while longer. However, China has been
diversifying its distribution channels and is no longer as reliant on the
U.S. consumer as they once were. Japan is going to have to focus its
resources and wealth on rebuilding their nation and industries following the
March 11th disaster. So, who will buy U.S. debt and keep the dollar alive?
The
only entity left to do this is the Federal Reserve and this simply amounts to
monetization of debt or theft from the citizenry and anyone else around the
world that is still ignorant enough to be holding U.S. dollars. This type of
talk was labeled conspiracy theory just a few short years ago, but now the
writing is on the wall in clear daylight for all to see. To be sure, there
will be plenty of Americans in denial about this possibility, but hiding your
head in the sand does not address or remedy the problem.
This will all lead to the United States defaulting on its debt obligations
and/or hyperinflation, likely alongside slowing economic activity
(stagflation). I believe there is precious little time to get out of U.S.
dollars and into tangible assets that can not be printed out of thin air or
inflated away. Silver at $50 may seem high at the moment, but it will look
insanely cheap in the event of a currency crisis, which seems all but
inevitable at this stage.
It is only a matter of time before we see a true downgrade of U.S. debt,
either via a credit agency or by wholesale dumping of dollars by China and
other creditor nations. If precious metals correct into the Summer as they
usually do, I will be aggressively adding to my positions in both bullion and
quality mining stocks. Of course, I’d love to be proven wrong and see the
dollar and economy stabilize and return to healthy organic growth.
Unfortunately, I don’t see that happening anytime soon.
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